Drop in inflation rate is only a temporary reprieve

Last month's inflation figures are a little bit better than expected, but the Bank of England won't be breaking open the champagne quite yet. Its wait and see approach on interest rates is still far from vindicated.

The bottom line is that prices continued rising in March, but a record monthly fall in food and drink prices prevented them from going up by quite as much as they have been. As a consequence CPI inflation eased from 4.4pc in February to 4pc in March. Unfortunately, the effect is likely to be only temporary. Inflation will soon be back on track to reach 5 per cent, as higher oil and energy costs feed through to prices at the pumps and utility bills.

All the same, the latest numbers provide encouraging evidence for Bank of England doves that inflation is at last beginning to behave as they've predicted. The expected May interest rate rise could as a consequence be taken off the table.

Slowing consumption – the British Retail Consortium on Monday reported that retail sales fell 1.9pc in March, the biggest monthly fall on record – has forced supermarkets to engage in aggressive price cutting to keep customers coming through the door. When demand is poor, business must respond by reducing its prices. That's what the Bank of England has been predicting will happen, and finally, the effect seems to be kicking in.

Regrettably, the sort of inflation Britain has today is not "demand-pull", where an excess of demand on limited supply pulls prices up, but "cost-push", where increased costs push prices higher. On the costs side of the ledger, there's no let up, from high energy and commodity prices, to growing wage inflation in the big manufacturing centres of China and the rest of the developing world. The terms of trade have turned seriously against the UK, with higher prices cutting ever more deeply into our standard of living.